GoPro (GPRO) Stock Has Limited Upside in a Long-Term Window

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One of the hottest names in the stock market recently has been GoPro Inc (NASDAQ:GPRO). GPRO stock is up nearly 25% over the past month versus a 2.5% gain for the S&P 500.

GoPro
Source: Shutterstock

The catalyst? Better than expected preliminary third quarter numbers. Revenue and gross margins are expected to be at the high-end of previously announced ranges. Meanwhile, GoPro expects to be profitable on a non-GAAP basis during the quarter.

Those better-than-expected numbers have investors betting that the bottom is in with GPRO stock.

After all, GoPro has some new products heading into the holiday season (Hero 6, Karma and Fusion). Those products will be sold alongside a buffed-out software offering. This combination of new software and hardware offerings could lead to the type of turnaround holiday period GoPro needs to get its stock back on track.

But that’s all hypothetical. Let’s remember that the better-than-expected numbers were for the third quarter, not the all-important holiday quarter. Let’s also remember that GPRO stock trades at 38.8 times next year’s consensus earnings estimate. The S&P 500 trades at just 17 times next year’s consensus earnings estimate.

So is there really more room to run in this GPRO turnaround?

GoPro Will Never Be That Big

The big problem with GoPro is that the company will never be that big.

Back in 2015, it looked like GoPro was going to be huge. Action cameras were the hottest gift and GPRO was the only name anyone knew in the action camera space. So, GoPro sold a whole bunch of action cameras– about 6.5 million in fiscal 2015.

Growth was supposed to skyrocket from that base. Everyone was supposed to get an action camera. It was the next big thing in consumer tech.

Only it wasn’t.

The novelty that propelled GoPro cameras to instant fame wore off. As it turns out, not everyone needs a GPRO camera because we don’t all surf, snowboard, skate or dirt-bike. We all do stuff that is worthy of recording, but Apple Inc. (NASDAQ:AAPL) already has us covered there because iPhone cameras are just so good these days.

Meanwhile, the cool effect also wore off. For a while, even those individuals who didn’t surf or dirt-bike bought GoPro cameras because it was the thing to do. But that isn’t the case anymore. The trendy Millennials that flocked to buy GoPro cameras in 2014/15 are now flocking to buy Spectacles from Snap Inc (NYSE:SNAP).

Don’t believe me? Just do a Google Trends search. GoPro’s popularity has been on a steady downtrend ever since Christmas 2014.

What is GPRO left with? A really small addressable market. That market is super-loyal (surfers and dirt-bikers aren’t going to use Spectacles or their iPhones), but it’s also super-small. Bulls hope that the Karma drone will introduce a whole bunch of new buyers, but industry leader DJI, a private Chinese firm, is currently dominating that market.

Overall, then, GoPro will just never be that big. This company will likely sell anywhere between 5 million and 6 million cameras per year over the next 5-plus years. That stable level of camera sales plus incremental drone revenue should allow revenues to grow around 10% per year over the next five years. Gross margins should stabilize. Operating expenses should be levered with positive revenue growth.

But even if GoPro does grow revenues 10% per year over the next 5 years and gets operating margins to around 10% (where they were in 2012 and 2013), that is still only $1.9 billion in revenues and $190 million in operating profits in 5 years. Slap a 34% tax rate on that and divide by about 136 million diluted shares, and you get to about $0.90 in earnings per share in five years.

Bottom Line on GPRO Stock

GPRO stock currently trades at $11.25.

This means the stock is trading at 12.5 times earnings that are 5 years out. That just feels too rich for a company with a hazy growth outlook, profitability problems and negative cash flows. After all, if you slap a long-term average 16 times price-to-earnings multiple on that $0.90 earnings base, you get a $14.50 stock in 5 years.

That isn’t much upside. In fact, it’s only about a 5% annualized return over the next five years.

5% growth? No thanks. I think I can find a much better rate of return elsewhere.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/gopro-gpro-stock-limited-upside/.

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